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Hi John,
Could you please help me answering this question?
Ling Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay, assuming a 360-day year. As a result, Ling Co has a trade receivables balance of $750,000. Ling Co relies on an overdraft to finance this at an annual interest rate of 8%. Ling Co is considering offering an early settlement discount to its customers of 0·5% for payment in 30 days.
It expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay on 30 days in order to obtain the discount
Calculate the net savings.
Do we take 35% instead of 25% when calculating the cost?
Also how do we calculate the New avg receivable days?Found this question a little confusing even after I went through the lecture
You use 35% in order to calculate the new average receivables.
35% will be received in 30 days, and the other 65% you would assume continued to take the current 60 days. So the average is (35% x 30) + (65% x 60) = 49.5 days.
So the new average receivables = 49.5/360 x $4.5M = 618,750So the reduction in receivables = 750,000 – 618,750 = 131,250
(The rest is as per the examiners own answer)
Sir why didnt we use 60days as the recievable days for the new recievablez? The rest ie (65%) of them is paying on normal credit period right? So 60days can be used to find the new recievables?
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